Question

Without an adjusting entry for accrued interest expense, liabilities and interest expense are understated, and net income and stockholders' equity are overstated. True or false?

Answer 1

True

Step-by-step explanation:

An adjusting entry for accrued interest expense will be recorded as follows in the books of the owing entity.

Debit Interest expenses account - (this will increase expenses)

Credit Interest payable (liability) account - (this will increase liability)

Therefore, without the above adjusting entry

• Liabilities will be understated, since the adjusting entry would have increased liability

• Interest expenses will be understated, since the adjusting entry would have increased interest expenses
• Net Income will be overstated, since a higher interest expense by the adjusting entry would have reduced net income
• Stockholders' equity will be overstated, since a higher interest expense by the adjusting entry would have reduced net income which would in turn reduce stockholders' equity.